The Dragons

Popa Octavian Paul Marketing International Grupa 3

The emerging markets are growing very fast since a few decades. Indeed, while western economies are stagnating, especially in these times of crisis, the emerging markets and more precisely China pursue their growth. Indeed with an expansion of its economy of around 10% for 30 years, China has become the worlds second largest economy and overtook Japan in 2010. The People's Republic of China (PRC) is the world's second largest economy by nominal GDP and by purchasing power parity after the United States. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. On a per capita income basis, China ranked 87th by nominal GDP and 92nd by GDP (PPP) in 2012, according to the International Monetary Fund (IMF). The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of the economy.

Regional development
These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

China Western Development, designed to increase the economic situation of the western provinces through capital investment and development of natural resources. The East Coast (with existing development programmes)

Revitalize Northeast China, to rejuvenate the industrial bases in Northeast China. It covers the three provinces of Heilongjiang, Jilin, and Liaoning, as

"Rise of Central China"

"Revitalize Northeast China"

"China Western Development"

well as the five eastern prefectures of Inner Mongolia.

Rise of Central China Plan, to accelerate the development of its central regions. It covers six provinces: Shanxi, Henan, Anhui, Hubei, Hunan, andJiangxi.

Third Front, focused on the southwestern provinces.

Foreign investment abroad:

Go Global, to encourage its enterprises to invest overseas. In this context, Chinese companies, also known as the Dragons, started to settle

themselves and gain more market shares by targeting first what are called the loose bricks. Then they extend themselves gradually into the global market. In fact, Chinese companies are no longer targeting the low-end markets but are orienting themselves into high-end markets and become therefore serious competitors for western companies and established global leaders. China, with its 3.4 million annual graduates, is becoming, as announced since a few decades by nearly all the economists of the planet, the first economic nation of the world. Although Chinese competitors are seen generally as producers of cheap products and low quality imitations, they succeeded in disrupting global competition by breaking the established rules of the game. Their main strategy was the cost innovation. In fact, Chinese companies were helped by two factors in disrupting this global competition: the Chinese advantages and the flattening of the world through globalization. Thus, Chinese companies gained access to more markets; also due to the structure of the economy and the strategies developed by international companies in outsourcing. It is thus what we call the Chinese Dragons that will soon cause a cost revolution, whether competitors are prepared or not. An important part of Chinas economic power is their workforce. Indeed, it is composed by nearly 150 million workers in the non-agricultural sector, 450 million in the rural sector, increasing by 10 million each year, with a support of more than 3 million graduates annually and most of them are oriented to the relevant needs of the economy. Moreover, Chinas wage rate represents 5 to 20 percent of those applicable in the USA, although there is an increasing trend. The growth occurs along with the productivity which will leave the situation unchanged for the

next 20 years. In this context, the Chinese Dragons learned to turn this advantage in their favor and use their low labor costs much better than their global competitors by using the cost innovation model across the full range of activities (design, marketing). Furthermore, an important part of the long-term transformation from a central planning model towards a market economy, the access to state assets and intellectual property for which the payment is lower than the full market value, appears to be very useful for Chinese groups. Despite the fact that the hybrid companies (private and public ownership) represent a disadvantage in developed economies, the resources of this form of companies are used in a more productive way in China creating commercial value and economic growth. Another plus for the Dragons lies in the fact that Chinese companies have greater separation between ownership and control than Western companies leaving more freedom to managers to take quick decisions, without pressure. The entrepreneurs are thus more motivated to take risks and innovate without being influenced by the decisions of their rivals. However, next to their numerous advantages, Chinese companies have also some handicaps. In order to overcome them, they open themselves more and more to the world, learning quite fast and are not afraid to hire the worlds best managers, becoming more and more global. Through the emergence of Internet inter alia, Chinese firms filled their gaps and succeeded in keeping up with leading-edge developments anywhere in the world. The Chinese companies barriers had also been reduced by an increasing concentration in the retail sector. The difference between then and now is that Chinese Dragons took advantage of the increasing globalization by hiring foreign experts, filling their knowledge gaps and establishing subsidiaries abroad. The internationalization of professional service firms has also opened a new gateway through which Chinese companies can catch up with the world best practices. The large size of the Chinese home market and the explosion of outsourcing give also to Chinese companies the potential to produce enormous volume and so, reap economies of scale that make them more competitive despite a narrow skill base. Indeed, generally, when new products are introduced, it is requested a premium price for customers. However, the Chinese Dragons use economies of scale and learning in order to allow prices to be cut still further which leads to a continuous volume expansion. Their reduced costs give them a much lower break-even which minimizes the risk of failure.

In brief, this combination of advantages with these new gateways into the global economy opened the door for Chinese companies to pursue their strategy of cost innovation by providing, as Clayton Christensen noticed it, products or services that initially look inferior to existing ones but which are more affordable and easier to use. In fact, innovation is the way to add value which is paid generally by customers through a price premium. However, the cost innovation focuses mainly on reducing costs or producing cheaper products with similar functionality at a better value for money. Chinese companies saw in this cost innovation their competitive advantage, they can gain the experience needed in their home market unlike their global competitors and exploit low costs in a way that global competitors have not thought of or find difficult to imitate. In this framework, Chinese companies act in the opposite way of their competitors by offering the latest high-tech products to mass-market customers at discount prices. In order to avoid any loss from this strategy of offering a large variety of products at low cost to customers world-wide, they focused on recombining existing technologies in ways that have not been thought about yet and on flexibility of the production process. This strategy of recombinative innovation was used to create new and improved models by combining existing ideas and technologies instead of developing additional products internally from scratch. Thus, we can say that the cost innovation developed by the Chinese companies is a great competitive weapon because of its power to disrupt global markets inter alia. However their strategy does not stop at these points. Indeed, we can also highlight the fact that they usually upgrade their chances of successfully penetrating the global market by identifying and seizing first the loose bricks among experienced competition. In order to understand the Chinese approach, it is mandatory to identify their perspective concerning the cost (innovation) structure, emerging economies and experience. In fact, the Dragons have four main loose bricks targets as shown in the table below.

The bottomend segments

Markets where the gains are at a very low level, because multinationals do not usually fight for this kind of segments which could represent a start for the Dragons to conquer even more profitable segments.

The peripheral geographic markets

These countries (Africa, Asia, and Eastern Europe) do not represent a big interest for the multinationals because they are small, demand low prices and have poor infrastructure. Since the Chinese market looks more or less like the peripheral ones (at least at the beginning, then they often orient themselves towards European and U.S. markets), it is much easier for the Dragons to handle it, which finally will lead to gain experience and create bigger volume.

The troublesome customers The niche segment

Dragons are wiling to satisfy troublesome customers (demands for an unique product), while incumbents refuse to change their rutine, because it implies big costs and sometimes a long-run process. The niche segment can be blowed appart by the Chinese cost innovation, transforming the niche into a mainstream market, by delivering high-tech, variety, customization and specific products at a very low cost.

All these loose bricks are an opportunity for the Dragons to put in practice their efficient manufacturing trough higher-value activities and close relationship with the customer. In this context, it is important to identify the vulnerabilies of Western companies, in order to succeed in the global market and to overcome the tough competition from China: The poor are also target customers which can afford and use products and services sold in developed markets. Not only developed markets appreciate and are willing to pay for high-tech. The bottom of the GPI (Global Prioritization Index) is also very important for the long run business viability. Managers are and should be interested in the business challenges with a humanitarian dimension, not only in the developed markets.

Nevertheless, it is important to emphasize that Chinese companies have also their own weaknesses. For instance, the Chinese market has a limited size so it is difficult to create volume, skills and gain experience at home before entering the global market. Moreover, when it comes to immature industries, the Chinese cost innovation is rather less effective. Within this category of economies it is difficult to be successful considering the Dragons lack of information at the technological level and experience. Because of this unfortunate situation, companies will also have to deal with the phenomenon of mistrust customers. Concerning the business systems, we can note that the Chinese enterprises are mistaken by dealing with the value chain as a whole which leads to higher risks. Another important weakness too, is the limited amount of Chinese reputed and branded firms. This is a reason for the consumers to avoid trying Chinese products. Moreover, the limited Dragons ability to be successful trough cost innovation within sectors like petrochemical, medicine and aircraft must also be noted. The main reasons of this restriction are the numerous patents in these industries and private and unencrypted technology. Anyway, the Dragons are not undefeated, especially when Western companies use cost innovation as a weapon to overcome them at their own game. The Chinese firms are indeed remarkable due to their high technology at low costs through research institutes. It is important to match the capability for variety at low costs, meaning that it is necessary for the Western companies to take into consideration the power of cost innovation as a strategy. Thus, another approach that should be taken into consideration by the foreign companies is the one concerning the possibility of delivering unique and more differentiated products at low costs. First of all, foreign firms can defeat the Chinese Dragons by changing their mind-set and strategy. They could also orient themselves towards the mainstream consumers from China, mostly by shifting high-value activities. According to all the elements mentioned above, it is obvious that cost innovation emerged as a result between a remarkable downward pressure on costs and an increasing opportunity to gain access to the worlds knowledge. Gaining shares in the global market is possible by relating the high-tech to the sensitivity of prices and offering customization at low cost. The outsourcing and division of industrys value chains into plug-and-play modules helped also Chinese newcomers to penetrate the global market.

However, China is confronting itself with disruptive competition since the Dragons deal with high technology at low prices and promote a big range of high-tech products by giving up premium costs. These facts supported the challenge of established market priorities, meaning that Chinese companies began to conquer peripheral markets first in order to reach more mature markets such as the U.S., Europe, Japan and others. Furthermore, we should not ignore the power of management. Indeed, the Chinese firms combine quite well the newest Western techniques and instruments with insights from traditional Chinese culture. To conclude, it can be said that the whole Chinese strategy, trough cost innovation, learning and customization capacity at low costs, is kind of a test that proves which company can survive and still be profitable while the Dragons come knocking at the door.

References
WILLIAMSON P.J., M. ZENG (2007) Dragons at your door: How Chinese cost innovation is disrupting global competition, Harvard Business School Press. Geert Hofstede (2012): http://geert-hofstede.com/china.html[Accessed 05/15/12] Made-in-China.com (2012): http://lcgroup.en.made-in-china.com/company-ShanghaiLiancheng-Group-Co-Ltd-.html[Accessed 05/15/12] The Economist (2011): http://www.economist.com/node/21524922[Accessed 05/15/12] http://en.wikipedia.org/wiki/Economy_of_China